A limited liability partnership (LLP) provides the ideal legal structure for entrepreneurs looking to launch their own businesses, especially in a professional sector such as law, accountancy, architecture, or engineering.
The LLP is a separate legal entity from its members (partners), who are only liable for the amount of money they invest, plus any personal guarantees.
The partnership is incorporated at Companies House and can only be used by profit-making businesses.
In this article, we will explain all you need to know about LLPs and the differences from a traditional partnership.
How does a limited liability partnership work?
Limited liability partnerships (LLPs) allow for a partnership structure where each partner's liabilities are limited to the amount they put into the business.
This is featured in the Limited Liability Partnership Act (LLPA) 2000, which provides for the establishment of LLPs in England, Wales, and Scotland.
This kind of partnership is often described as a halfway between a traditional partnership and a limited liability company. An LLP limits the liability of each partner whilst providing the flexibility of a partnership.
Having business partners means spreading the risk, leveraging individual skills and expertise, and establishing a division of labour.
It is ideal for businesses that do not require ongoing capital investment to meet aggressive growth targets.
What are the benefits of an LLP?
There are several pros and cons respecting LLPs, but there are many reasons why many entrepreneurs prefer to go in for an LLP; below, we mention some of them:
- It is a separate legal entity and can therefore enter into contracts, apply for tenders, and take on debt in its name, which limits the partners' liability
- It can be set up with little capital expenditure
- It is governed by the LLPA 2000 and an LLP Members’ Agreement, as the Partnership Act 1890 does not apply to LLPs
- The partners are treated as self-employed and pay income tax on their share of the LLP’s profits
What are the disadvantages of an LLP?
Unfortunately, the LLPs also come with various disadvantages, as mentioned below:
- The accounts must be filed at Companies House; therefore, any member of the public can view these
- All profits achieved by an LLP must be distributed in the same financial year and cannot be retained; unlike a limited company
- It must have a minimum of two members and elect two designated members, which can result in considerable work for the founders of a business comprising initially of two partners
What is the difference between an LLP and a traditional partnership?
Unlike a traditional partnership, LLP is not governed by the Partnership Act 1890.
Unless a formal Partnership Agreement is in place, the partnership will be automatically dissolved if one partner resigns, retires, or dies. Furthermore, under the Partnership Act 1890, all partners share equally in the business's profits, whether or not they do any work.
The LLPA 2000 state that a partnership can continue if one of the partners resigns, retires, or dies.
However, it is still best practice to have a Partnership Agreement in place, as this will ensure that the partnership is operated and managed according to the wishes of its members rather than by rules imposed by legislation.
How do I set up an LLP?
There are two ways to incorporate an LLP. You can use a third-party such as an accountant, to register your LLP or download the setup form and send it to Companies House.
To set up an LLP, you must:
- Appoint two designated members
- Choose a unique business name
- Have a registered business address (this will be available to the public)
- Register the LLP with Companies House
The LLP will be registered if the application is correctly completed, the proposed name is acceptable, and the fee has been paid. The Companies House will then issue the certificate of incorporation.
What is a designated member?
The designated members of an LLP perform specific duties concerning the legal administration of an LLP. In a regular company, the company secretary or directors would perform this.
An LLP must appoint two designated members. If there are no designated members, or only one, all members are deemed to be designated members.
The designated members have a statutory responsibility to:
- Prepare, sign, and send annual accounts
- Appoint and remove auditors
- Notify Companies House of any changes in membership
- Register the business for self-assessment with HMRC (the designated members must also register themselves for self-assessment)
- Apply to have the LLP removed from the register
What documents does an LLP have to file with Companies House?
Examples of the documents that the LLP must file with Companies House include:
- A confirmation statement
- Annual accounts
- Notification of changes to the LLP’s membership
- Notification of changes to the registered office address
- Notification of changes to a member’s status (from member to designated member or vice versa)
- Details of any mortgage or charge created by the LLP
- Notice of a single alternative inspection location (SAIL) where LLP records are kept for inspection at an address other than the registered office
Do partnerships have a company registration number?
As ordinary partnerships are not registered at Companies House, they do not have a registration number. However, LLPs do receive a unique reference upon registering with Companies House.
Is an LLP Members’ Agreement mandatory?
You do not have to have an LLP Members’ Agreement, but it is advisable to put one in place.
The agreement will set out how the partnership is to operate and clarify matters such as:
- The responsibilities of each partner
- How profits are shared
- The initial capital investment of each partner
- What happens when a partner resigns or dies
- Dismissing a partner from the LLP
- How decisions are made
- Dispute resolution processes and procedures
Our commercial law solicitors can provide helpful, friendly advice on drafting and negotiating a robust LLP Agreement, or you can download our free template below.
Do limited liability partnerships pay corporation tax?
An LLP as an entity isn't taxable, but the members are. So, a company tax return or corporation tax are not needed for an LLP.
Instead, the untaxed profits are distributed to its members. They then pay tax on the value of their portion. The members need to complete a self-assessment tax return for tax purposes.
Get legal assistance from LawBite
For certain types of businesses, an LLP is an ideal legal structure. We can assist you with discovering the advantages and disadvantages of establishing your start-up as an LLP and drafting a bespoke LLPAgreement.
Working with LawBite allows you to relax and focus on your clients and your business, knowing that your partnership's legal aspects have been expertly taken care of.